A reverse mortgage is a loan that secured by your home equity. You receive money from the lender, and typically you don’t have to pay it back until you sell or move away from your home. In the meantime, you can remain in your home. It may sound like the perfect solution for accessing necessary funds, but there can be pitfalls — including the possibility of foreclosure if you don’t understand the terms of the loan.
Are there different types of reverse mortgages?
There are three types of reverse mortgages:
Single-purpose reverse mortgages are offered by state and local government agencies and nonprofit organizations, and are not available in every state. The loan must be used for a single specified purpose, such as paying off property taxes. Low or moderate income homeowners can usually qualify for these loans, which carry the lowest upfront costs and fees.
Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs) are backed by the U. S. Department of Housing and Urban Development (HUD). HECMs can carry high upfront costs (higher than traditional home loans, in many cases). HECM loans can be used for any purpose, and have no income requirements. You must be at least 62 years old to qualify. Before you are approved for the loan you need to meet with a counselor from a government-approved housing counseling agency, who will explain the process, costs, and may provide information about other types of loans. Make sure you ask about the payment plans, fees, and any other costs that can affect the total costs of the loan over time.
Proprietary reverse mortgages are offered by for-profit companies, and can also carry higher fees than single-purpose mortgages. Some lenders will require you to discuss the loan with an independent counselor before you are approved. The counselor can help you explore options for other types of loans, and answer all of your questions about the reverse mortgage you are considering.
How much can I borrow?
The amount you can borrow is calculated according to the amount of equity you have in your home, its appraised value, current interest rates and your age.
How do I receive the money?
The terms of the reverse mortgage you select will detail how you can access the funds. If your loan is provided as a “term” option you will receive monthly fixed payments for a specific time. “Tenure” loans provide a fixed monthly payment for as long as you live in your home. You may also receive payments as a line of credit, or in a combination of monthly payments and a line of credit.
Important Things to Consider
Reverse mortgage loans are not taxable, and typically do not affect your Social Security or Medicare benefits.
Upfront fees may include an origination fee, a mortgage insurance premium and other closing costs for a reverse mortgage. There may also be service fees imposed throughout the term of the loan. Ask your counselor or lender to clarify the Total Annual Loan Cost (TALC) rates: the projected annual average cost of the reverse mortgage, including all the itemized costs.
It is important to make sure that both spouses are listed on the loan paperwork. If both aren’t on the loan, and one spouse moves to assisted care or dies, the other will have to repay the loan within a year or move out.
The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month.
The loan is tied to the value of your home. If you cannot pay property taxes, homeowner’s insurance, or maintain your home, your loan may become immediately payable. Make sure you fully understand all of the conditions that could make the loan due and payable.Of the almost 600,000 reverse mortgages in place now, 9.8% are delinquent, up from 8% in 2011, according to the U.S. Department of Housing and Urban Development.
Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off.
For more information on reverse mortgages, see AARP’s Reverse Mortgage Education Project and HUD’s webpage about HECMs.